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Posts tagged ‘Raghuram Rajan’

Rexit technical brilliance, enter political economy expertise

rajan thinker

Rajan the thinking central banker: photo credit: bloomberg.com

Raghuram Rajan, India’s central banking czar, will be history by September 2016. He enjoys unprecedented popularity and near cult status as Governor of the Reserve Bank of India. Some of this has to do with his youthful looks and fresh demeanor — unusual in a profession peopled by dour old men. But much of his appeal is related to the confidence and skill he brings to the job, which he plunged into in weeks, rather than the months, which are the usual learning curve.

Even business — usually taciturn about rooting for bureaucrats, has also publicly supported his conservative strategy to keep the rupee stable; build foreign reserves; check inflation and ensure reasonable positive real interest rates, to protect the large mass of middle-class savers. International capital flows, which are as much about fundamentals as about the Iqbal — the credibility and charisma — of the central bank, responded well to his strategy for stability with fundamental reform.

Job specific technical brilliance and international standing matters

Rajan is the first RBI governor to came to the job with considerable experience in international finance (in the IMF) and even more significantly, a long spell in American academia, in the same area. To the billionaires who make the markets move, Rajan is a familiar face, with a track record of original thinking and practical foresight. He is best known for disagreeing with mainstream economists and foretelling the 2008 financial meltdown.

Rajan’s exquisite symphony- the “Dardnama” (book of pain)

In India, his legacy is the exquisite symphony, he wrote, of caution mixed with big-bang reforms. On interest rates, he was consistently cautious. His mantra was that flooding the economy with cheap money is not a quick-fix for growth. Instead, it can spark off high inflation, as in Brazil.

To the common man, this resonates well with the millennium’s continuing conundrum of jobless, inequitable, high growth. There are no quick fixes for these flaws in today’s post-industrial, service-oriented growth model. Rajan had no choice except to focus on keeping inflation low; preserving the real incomes of the disadvantaged who don’t have the luxury of inflation-indexed incomes and pushing banks and industry hard to become competitive.

His historic big reform was break with the past and publicly finger banks that had lent inefficiently, destroyed capital and most likely enhanced corruption — given the magnitude of bad loans accumulated by them since 2011.

He shone a bright light on the dodgy bank loans overburden- shockingly high at more than 12% of bank assets and 4% of GDP, rather than keeping them hidden under furtive, refinance Ponzi schemes. He was likened by “incremental reformers” to a bull in a china shop — pulling down both fraudsters and unlucky entrepreneurs with equal ferocity.

Admittedly, big-bang reforms shake up the cozy status quo and inflicts pain. But if followed through with decisive surgery, as Rajan recommended, it could have created sustainable wealth, in the medium term, rather than slowly bleed the financial system till it collapses, as happened in the developed world in 2008.

“Big bang” reforms too disruptive for India’s political economy

Will there ever be another Rajan as RBI governor? More importantly do we need another Rajan, given our political economy?

India is a conflicted society — at once eulogizing “savants” like Rajan, and yet shrinking away from the ripples they create in the village pond. It takes a lifetime of work in India to play the system harmoniously. Rajan came before India was ready for him. So while we may not be able to digest a Rajan today, there is unlikely to be a shortage of “suitable” talent. But the real pity is — why have we tried to “fix” a system that is not broken. Why not let the good work continue?

Tough global headwinds for the new Governor

head winds

Grapic credit: janeaustenslondon.com

The irony is that by letting Rajan go in September this year, the government will actually be cementing his “rock star” legacy. The second half of 2016 is blighted by uncertainty and will be hell for the new governor. First, is the near-term question mark over Brexit on June 23. If the “Leavers” win, Europe is surely in for turbulent times. But this may not actually happen, as the British are far too practical to be brash and emotional.

Second, even without a Brexit, the economic outlook is gloomy. Protectionism is growing and geopolitical instability is getting worse. These are fertile grounds for a flight of capital to safety and away from emerging markets like India. A tightening by the US Federal Reserve in the second half of this year may convert the capital flight into an outward-bound tsunami, severely denting our foreign exchange reserves and importing instability.

Oily silver linings and political compulsions

vote 2016

India’s largest state-Uttar Pradesh, votes in 2016: photo credit: teluguflavours.com

The only good news is that oil prices are likely to remain low. The low lead time for the mothballed 500-odd oil fracking rigs in the United States to return to work ensures that any uptick in price beyond $50 will deliver a supply response. Saudi Arabia, with nominal production costs, a deficit budget and a deficit current account and a proposed public listing for its oil company, is unlikely to rein in production or oil revenue. But low oil prices also depress incomes in oil-producing countries, which is bad for Indian exports and disastrous for inward remittances — that are largely dependent on the Gulf countries remaining lucrative employment sinks for Indian expatriates.

Low growth potential in the coming years, combined with the domestic compulsions of the largest state election in Uttar Pradesh in 2017 and three smaller states and a national election in 2019, are likely to strain the fiscal discipline, which the finance minister has assiduously built up since 2014. Rajan was lucky. But had yet to be “Indianised”. He would have got there. But time ran out.

Job description for applicants

queue

India financial leadership job vacant- only the best need apply: photo credit: blogs.wsj.com

Needed an RBI Governor with the political acumen to align with the government’s compulsions. Must be able to quickly improve the well-being of voters. Must also have the economic guile to minimize the resultant damage caused by politics to the economy. Must have his finger on the pulse of Bharat; the experience of having walked this tightrope earlier and the good fortune of being lucky. Must be able to strike practical deals — with big defaulters to ensure that capital starts getting rolled over; with banks so that interest rate cuts are passed on to borrowers; with the government so that Rajan’s “dosanomics” inspired efficiency enhancing incentives are carried forward: cut red tape and discretion in licensing of financial intermediaries; keep interest rates positive in real terms; exercise forensic oversight over banking discipline. Must be reconciled to the macro-economic ball being carried mostly by the government. Must have the access and ability to discreetly warn the government against scoring self-goals.

Adapted from the authors article in The Asian Age, June 19, 2016 : http://www.asianage.com/columnists/does-rbi-needs-political-governor-511

Why Raghuram Rajan is not Indian

Yes, it’s true. Raghuram Rajan is very Un-Indian on multiple counts.

RR early

Photocredit: live.av.info  Raghuram Rajan a youthful financial messiah amidst grey heads

Early start

First, like Dr. Manmohan Singh before him and unlike every other Governor of the Reserve Bank, Rajan became governor at the “tender”, almost youthful age -by Indian metrics- of just fifty years. This is a tribute to his compelling competitiveness for the position. But more importantly, this means he is likely to have a long professional after-life, once he stops being Governor, just like Dr. Singh.

Not wedded to holding everlasting public office

But unlike Dr. Singh, Rajan is keeping his professional options open in case his term is not extended in September 2016. Of course, Rajan is not the first RBI Governor to contemplate an after- life out of public office. I. G. Patel, who also became the fourteenth Governor of the RBI at a relatively young age, went on to head the IIM Ahmedabad and then the London School of Economics. He is also reputed to have declined the offer to become Finance Minister in 1991.  But such instances of daring to dream beyond everlasting public office are rare.

The outsider

RRajan outsider

photocredit: mumbaimirror.com

Second, Rajan, unlike all his predecessors, did not come to the Governor’s office via the serpentine pathways of the extended public sector. Instead, like millions of upwardly mobile, middle class Indians of his generation, he earned his spurs in the US, in academia and then in the International Monetary Fund – where merit means having the capacity to challenge the established status quo with evidenced, sensible and better policy options.

Mission: To perturb, not preserve, the status quo for equitable growth

Perturbing the status quo is not a quality held in high regard in the backward looking Delhi Durbar. Here, precedent and incremental change- often mistakenly equated with policy predictability – command a premium. Rajan stands out for his impatience with an India, known perpetually for its potential but with an unendingly, shoddy present. Worse, he speaks out against a financial system, which has traditionally encouraged crony capitalism; been cavalier with the rights of the poor and constrained, rather than freed, India’s abundant animal spirits.

Tactics: Unafraid to work only for public interest

Third, Rajan’s single minded pursuit of macro-economic stability – read low inflation- in an increasingly uncertain world, marks him out as an outlier. The dominant, albeit convenient, consensus in India, is that we can simply spend our way out of an economic downturn, without feeling the pain of the structural reforms, which underpin sustainable and equitable growth. This is understandable, because inflation doesn’t really bother Imperial Delhi, Mercantile Mumbai or Harit Hapur- the triumvirate which moves India.

After all, babu pay and pension is 100% indexed to inflation, so why worry? Inflation doesn’t bother corporate India either. It pushes real interest rates into negative territory; reduces the cost of servicing debt and makes fresh borrowing cheap. Nor does inflation bother big farmers. The cereals or sugarcane they produce are sold on a cost plus price fixed by government. Never mind, that inflation is a silent killer – of daily wagers in the unorganised rural and urban sector, who have to eat one roti less, to make do and the lower middle class and the aged, who see their savings go up in smoke.

Metrics: Cut red tape and discretion in bank licensing

Fourth, by making available private bank licenses on-tap for eligible entities, Rajan displays completely Un-Indian haste in throwing away executive discretion in favour of transparency. By disciplining banks and forcing them to clean up their balance sheets, Rajan is exceedingly Un-Indian. He hits at the roots of the cozy relationship between politics and corporate money, which dates back to the Freedom Movement.

Market value: Options on both sides of the Indo-American universe

Lastly, Rajan’s ultimate betrayal of Bharatiyata is that he holds a Green Card, which entitles him to permanent residence in the US. Even worse, he wants to hang onto that privilege, if he gets a second term as Governor, post September 2016. Should he not have reciprocated his everlasting gratitude to the nation, on being appointed Governor, by tearing up his Green Card? Certainly, it would have been a grand gesture of his long term commitment to India, had he done so. But in a democracy, contractual obligations are determined by the law, not sentiment.

Attitude: Professional not a supplicant

But most galling is that by hanging onto his Green Card, Rajan displays a very Un-Indian desire to seek a second term, not as an abject supplicant but as a professional, on terms, which are mutually acceptable between him and his employer – the Government of India. Of course this is never-before-seen arrogance, by the standards of the public sector, where applicants must wait cap in hand, for the chance to serve.

Role model: For Indian bureaucrats

The upside, in this otherwise grim tale, is that Rajan’s approach is the only way we will ever have a professional, merit based bureaucracy, working in public, rather than narrow political interest. The internationally recognized system of contractual, senior public service appointments, has never found salience in India because politicians fear losing control over a pliant bureaucracy. Contractually appointed professionals, like Rajan, can say no, because they have market based options, outside the public sector.

Every Indian expatriate values competition and choice

But, consider also, that the hordes of expatriate Indians who throng Prime Minister Modi’s meetings overseas, are similarly Un-Indian, like Rajan, because they value competition and choice above embedded entitlements.

Not too different from any other worker in the Indian private sector

Guess what, 97% of the workforce in the Indian private sector are also Un-Indian, like Rajan, because they have no secure, life-time tenures. They face the test of competitiveness, on a daily basis.

arun jaitley London

Photo credit: Business standard.com:  Finance Minister, Arun Jaitley very much in tune with the future.

In fact, even Finance Minister Arun Jaitley might also be Un-Indian, under his very Indian clothes. After all, he does seem to be quite comfortable with Rajan and birds of a feather flock together. But, then again, perhaps not. After all, Jaitley’s Hindi is impeccable, whilst no one has ever heard Rajan speak in Hindi. Field Marshall K. M. Cariappa, India’s first commander-in- chief of the army, couldn’t speak in Hindi either. When berated by the entho nationalists of his time, he riposted, that he made up for not knowing Hindi by having a dil (heart) which was “ek dum Hindustani”. Surely, so is Rajan’s and that should be good enough.

cariappa

Field Marshall K.M. Cariappa- speaking from the heart 

Adapted  from the authors article in Newsiaundry  May 23, 2016    http://www.newslaundry.com/2016/05/23/why-raghuram-rajan-is-not-indian/

Indian Economic Survey 2016: Bewinderingly optimistic

Arvind S

Arvind Subramanian Chief Economic Advisor- GOI: Rising star and Rajan clone?

The Indian Economic Survey is an annual document that is wrongly titled. The data it reveals is overpowered by large dollops of economic wisdom, literature and policy analysis. Arvind Subramanian, India’s Chief Economic Advisor and the key author of this year’s Survey, has clearly burnt the midnight oil liberally in making the Survey a reader’s delight, even for one who has only a nodding acquaintance with economics, gleaned primarily by pursuing the pink papers.

Running hard to stand still

The key guidance the general public has been looking forward to, is the credibility of the near miraculous GDP growth rate of 7.6 % recorded this year and in that context, prospects for the next year. Unfortunately, clarity still eludes the average reader. Whilst generally optimistic about the government’s ability to improve on the performance this year, the survey is curiously negative on growth prospects for next year (7 to 7.75%), which it says would be strongly dependent on world growth reviving rather than domestic reform being implemented. Running hard to stand still is not a very good incentive for public sector reform. Consequently, India should brace for lower growth next year.

Better fiscal administration but significant legacy problems

The Survey makes the point that over the last year India has done more than most of its peer countries- those with an investment grade of BBB, including China, to retain macroeconomic stability per the index of macro-economic vulnerability developed in the Survey last year. But it simultaneously notes that the quality of assets in government-owned banks has been deteriorating since 2010. This is complemented by the overleveraged position of large business houses who are finding it difficult to service these loans because market conditions are adverse and both the top-line and their bottom-line have taken a hit. Exports have reduced by 18% last year and the competitiveness of domestic suppliers even to meet domestic demand is dodgy. The domestic steel industry being the most recent example.

The popular explanation for the logjam in corporate funds has been that the financial stress of big corporates has less to do with inefficiency or injudicious resource allocations by them. The blame is pinned on government projects not progressing smoothly over the last few years of the previous government resulting in corporate funds getting blocked unproductively.

gadkari

Minister Nitin Gadkari doing the impossible- shaking the dust off moribund highway projects

But over the current year Minister Nitin Gadkari has revitalized the implementation of a large number of projects in the highways sector. Railways Minister Suresh Prabhu has similarly awarded more than double the level of contracts in railways than was the trend earlier.

prabhu Minister

Minister Suresh Prabhu -improving the plumbing of  Indian Rail – a colonial legacy and democracy’s neglected child 

State governments have also enhanced public investment per the Survey which states that the combined public investment increased by 0.8% of GDP over the first three quarters of the current year versus the previous year with state government contributing 46% of the investment.

Why then does corporate loan servicing remain a problem? Is it just a time lag issue before public expenditure decisions kick in and funds flow resumes to corporates? If this is the case  the salutary effects should be visible next year. Or is it that the loan defaults have less to do with poor implementation of government contracts than with the “smart” arbitrage strategy of big corporates to borrow domestically in an unreasonably strong rupee, post 2013 and salt investments away safely overseas? Is it not necessary then to keep the rupee at aggressively competitive levels to avoid the incentive for “carry trade”, boost export competitiveness and price the fiscal impact of imports- particularly oil, realistically?

Does a high risk fiscal strategy make sense?

If the economy could chalk up a relatively high growth rate of 7.6% this year, despite the adverse conditions, why then is there a clamour for more liquidity and lower interest rates to kick start private investment and to fund higher levels of public investment in the coming year?

Would it not be sensible to stick to fiscal rectitude and keep the fiscal deficit target at 3.5% of GDP and hope for the same growth rates next year particularly if domestic actions will count less than world growth and demand?

Does it not make sense to guard against the risk of inflation- particularly drought induced food inflation? Our poorly integrated agricultural markets and inadequately prepared public management structures for managing food inflation by using market mechanisms are unlikely to be effective to deal with the risk of such inflation should the next year also be dry.

Oil prices remain volatile even though the survey is sanguine on the potential for an oil price increase. Whilst there is still no agreement amongst the top oil producers for limiting production, India is badly placed, being heavily (85%) import dependent, to bank on low oil prices continuing. Adequate fiscal space must be reserved for dealing with an oil price shock. These could be occasions when drawing down capital from a highly capitalized Reserve Bank of India (the survey labels it second only to Norway in being highly capitalized) can help without increasing the debt burden.

At least Mint Street is like Norway – we like that

Drawing down RBI reserves to fund dodgy capital investments in the public sector is a bad idea. It would be ok in Norway but not if accountability levels are low.Oddly, to an average India, the fact that we are close to being like Norway, as least with respect to the RBI is comforting and gives hopes. Indians are notoriously miserly and magnificent savers.

rajan RBI

RBI Governor Raghram Rajan – firm as a Norwegian rock: photo credit: businessindia.com

Tax revenue complacency

The survey skirts around the advisability of increasing the ratio of tax to GDP above the 10% achieved last year. It appears  complacent that tax buoyancy in the first three quarters of current year exceeds the average of the last three years- particularly for indirect taxes. The full year’s data would only be available with a lag but the budget documents would show if this happy trend has persisted in the last quarter also and whether the revenue deficit is indeed on track as a consequence.

Ignoring the impact of committed and contingent revenue expenditure

The significant burden (Rs 100,000 crore) imposed by the 7th Pay Commission has been dealt with lightly. Enhanced government salary and pension can increase expenditure by 0.6% of GDP for the Union government alone and threaten the revenue deficit target. The jury is still out on its possible beneficial impact on stimulating demand.

More importantly, the survey deals unduly summarily with the issue of enhancing rural income support and social protection as necessary adjuncts of macro- economic stability. Marco-economic stability can be the first victim if India’s political stability is compromised by concentrated high growth, which is not reflected in shared prosperity. The survey notes that 42% of Indian households are dependent on the rural economy. What it does not mention is the low ability of 60% of households to adapt to income shocks emanating from loss of insecure jobs, medical emergencies or other social obligations. Food for this segment accounts for approximately 40% of their expenditure. Rural wages are down 2.5% this year. Around 40,000 jobs have been lost per the Labour Bureau’s September 2015 report. Even the IT industry has reduced jobs and IT majors like INFOSYS -under a new leadership- are automating processes and putting employees out to pasture. These ground signals fit the survey’s assessment of India being in a hard place. But the survey is short on the best options for dealing with this economic shock.

The historical inadequacy in dealing with out-of-control and poorly targeted power, fertilizer, food, water, public transport subsidies hinges around the inability of elected governments to be seen to be heavy handed with income strapped households. These resultant fiscal pressures amounting to around 5% of GDP (all of government) can only escalate in the highly charged political environment during the next two years on account of state level elections.

A soft Railway Budget- harbinger of the main budget?

The Rail Budget 2016-17 could be a harbinger of such populism. Despite a large number of facilities and passenger amenities being announced there was no increase in the passenger fares which recover on average only around one half of the cost of services. Air India continues to be heavily subsidized. Loss making PSUs continue to sap public resources. How credible the fiscal consolidation plan can be in the face of these risks remains unclear.

Hopefully the Finance Minister will show the way on Monday in the Union Budget 2016-17. We await with bated breath.

Adapted from the authors article in The Wire February 26, 2015 http://thewire.in/2016/02/26/the-bewildering-optimism-of-the-economic-survey-22864/

Gov. Rajan gets it wrong this time

Gov Rajan

(photo credit: economic times.com)

RBI Governor Raghuram Rajan got it horribly wrong when he amended PM Modi’s “make in India” program by adding a “make for India” byline in his FICCI address yesterday.

What on earth could he have meant? Was he implying that the domestic economy should be further insulated from foreign competition? That is the only way domestic industry can be induced to make only for India, rather than for the World, including India?

How does this “home centric” approach fit with his view, reiterated in the same FICCI event, that the economy needs to be more open. In an open economy business “makes” for markets worldwide because production and value chains are transnational and product standards, designs and prices converge across the globe squeezing out fat.

Indian industry did “make for India” pre the 1991 liberalization. The result was a small, fat big-business set; high prices; shortages and shoddy goods. The biggest achievement of liberalization is a convergence of product standards towards international levels because of import competition and the ample and ready availability of goods- except where government erroneously continues to believe that fixing maximum prices for goods and services can work. It does not, as we can see in electricity supply and now in drugs and pharma where shortages are resurfacing.

Exhorting Indian industry to restrict itself to the domestic market is an ominous sign of the export pessimism rampant in the pre-liberalisation period. Does this also mean that Governor Rajan will keep the INR unreasonably strong to keep imports (petroleum products) cheap at the expense of export competitiveness?
Surely the defence manufacturing we are initiating is not just meant for domestic consumption. Unless Indian armaments are in regular use in conflicts and wars internationally, how can we possibly be sure of their quality or get the “consumer” feedback for quality enhancement?

Maybe Rajan’s “rock star” status as an economic wizard got the better of him. After all, PM Modi’s penchant for acronyms and by-lines has now become national mania, rendering intelligible conversation impossible, littered as it now is, with 3AAA and 5Cs. But trying to best the PM can be fatal, even for an outstanding, independent regulator. Even the US President would look askance at the Fed. Chair speaking, out of turn, outside her circumscribed official ambit.

But on matters more related to his current charge, he got things right, as usual. In a downturn, especially with inefficient and wasteful government machinery, it is a better to leave income in the hands of the earner rather than transfer it to government via higher tax rates. The “income effect”, enhanced by the low inflation target of Gov. Rajan, induces consumers to spend and feeds into demand led private investments which is good for jobs and growth.

The conundrum, if tax rates are to be relaxed or if tax exemptions for savings enhanced, is how to balance the budget?

Here is a list of the “low hanging fruit” available.

First, our traditional expertise in going around with a begging bowl is best. PM Modi is prescient in aggressively seeking external grants and concessional funding from the word go. The challenge now is converting pledges into cash flows.

Second, ruthlessly cut revenue expenditure, particularly on general administration. This is a necessary “evil” to show that the government means business.

Third, our annual public investments are barely 12% of total expenditure. This requires stopping gold-plated construction and using the existing space better. Witness the new, palatial External Affairs Office complex in Delhi, which remains underused because it is far from the South Block-located-PMO. Anyone housed in the new office attracts the unwelcome tag of being farther from the powers-that-be than even the mother ministry.

Using the available space rationally, simply by squeezing government servants together can help. Today, senior officers occupy office rooms often much larger that the living room of their government allotted homes. Notice how even mid-level government officers do not work in “row cubicles”, as in private firms and there are no common-use spaces for work meetings. Every office is designed to accommodate a “durbar” suitable in size for the concerned officer – this is reminiscent of the hierarchy of “Princes”, established by the “Raj”, based on the number of guns fired in salute of a Prince.

Slashing perks like liberal use of office provided phones and cars and a cut on travel budgets are also necessary, albeit symbolic measures, for flagging the need for economy.

Fourth, more substantively, using the existing government investment in State Owned Enterprises (SOEs) more aggressively can help. For starters, increase the dividend payout ratio from 44% to 66%. This adds around Rs 25,000 crores to revenue – only 1.4% of the total budgetary resources – but sufficient to increase the central plan expenditure by a hefty 25%.

Higher payouts and consequential constrains on accessing internal resources will also force SOEs to become leaner and look for alternative PPP models for financing operations and investments. Listing more SOEs on the stock exchanges and launching an aggressive privatization program can leverage the economy; attract foreign and domestic private investment and create more fiscal room for Greenfield public investments.

Governor Rajan in right in predicting strained economic circumstances in the near term. But hiding behind the default option of producing only for our huge domestic market and hapless domestic customers, is not the answer – nor is tight market segmentation between the domestic and overseas markets possible. God save us from anyone advocating a back-to-the-future strategy of turning resurgent India into a fortress.

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